What to Do When Your Retirement ‘Number’ Seems Impossibly Big

It’s a pretty common story.

Something happens that triggers a person to start thinking about retirement. Maybe they read an article in a magazine while waiting at the dentist’s office. Perhaps they hear a radio story while driving to work. Maybe they hear about the 401(k) at work and it sticks in their mind.

Whatever it is, they go home and start doing a bit of research into retirement and they learn about the “4% rule,” which is often the first thing that people hear about when it comes to retirement. Basically, the 4% rule states that for your retirement savings to last through a typical retirement (age 65 to 95), you need to be able to live off of 4% of the value of your retirement savings on the day you retire — so you just multiply how much you need to live on each year by 25 to get an estimate of how much you’ll need to save.

Let’s say that person anticipates needing to be able to live off of $40,000 before taxes, so they multiply that by 25.

That’s a million dollars. A million dollars.

Now, for the typical American that has around $40,000 in household income, that number seems completely and totally unrealistic and, frankly, rather scary. It seems like an utterly impossible goal to reach.

But before you give up, here are some things to think about. Most of these calculations are “back of the envelope” numbers to give you the idea of how different things can really help with that number, but everyone’s situation is a little different. The key thing to remember is that it’s not as bad as you think.

Dr. Evil meme: One Million Dollars

No matter how you say it, a million dollars sounds almost unattainable for most retirement savers. Image: AussieMemes.com.au

Remember That Social Security Will Help

First of all, you’re not going to be responsible for that full million dollar bill. Social Security is going to step in here and help you out.

Take a look at this quick Social Security benefits calculator. It can help you get a quick estimate of what your monthly Social Security benefit will look like.

For a person born in 1960 and making $40,000 a year, that calculator estimates that they will have a monthly benefit of $1,401 in today’s dollars. Multiply that by 12 and you’ve got an annual benefit of $16,812 from the Social Security office. Not bad!

Since you’re shooting for an annual amount of $40,000 to live off of, you’ll want to subtract $16,812 from that, giving you $23,188 per year that you need to come up with. Multiplying that by 25 gives you a new retirement savings goal of $579,700.

$579,700 is a far more reachable goal than $1 million by anyone’s standards.

Check out that quick Social Security benefits calculator for yourself. Put in some numbers that represent your personal situation and see how much per month or per year that you’re going to receive. You’ll find that your Social Security check takes a big bite out of your retirement number.

Remember That Normal Lifestyle Changes Will Help, Too

One aspect that many people don’t consider when it comes to retirement is how their expenses drop drastically. There’s no more commuting, which means fewer or no more gas and maintenance expenses on their car. There are no more work lunches. There’s no more work wardrobe, either. Even if you change nothing about your personal life, the reduction in expenses from your professional life are going to make a big difference.

Let’s say that 10% of this person’s $40,000 salary was going toward these professional expenses and once that person retires, they’re not going to need them any more. That person’s required annual income is thus now $36,000.

So, if we subtract out the annual benefit from Social Security of $16,812, we’re left with an annual shortfall of $19,188. Multiply that by 25 and you now have a retirement target number of $479,700.

Think about that for a second. By stepping back and looking at the problem more realistically from just two angles, your target retirement number drops significantly. It dropped by more than half in this example.

In our case, my work expenses are really low, but Sarah has a commute and a professional wardrobe to maintain, as well as expenses to maintain her certifications. All of those expenses vanish instantly as soon as she retires. Our personal lifestyle will remain the same, but a healthy chunk of spending just vanishes.

Remember the Power of Compound Interest

Still, $479,700 seems like an imposing number. It’s not as bad as the $1 million number we initially looked at, but it’s still intense. However, there’s still another big tool that works in your favor – the power of compound interest.

Let’s use Warren Buffett’s assumption that the stock market will return 7% over the long term. We’re going to actually roll inflation in here and subtract out 2% of that growth, leaving 5% annual growth. So, right here, we’re accounting for inflation.

If your timeframe is 20 years – meaning that you’re around age 45 – you’ll need to save $13,600 per year to make it. That’s about $1,140 per month, or about $260 per week over the course of the year. Your total savings is only $272,000 – the rest is covered by the power of compound interest. You can spread that $272,000 across 20 years, too.

If your timeframe is 25 years – meaning you’re around age 40 – you’ll need to only save $9,500 per year to make it. That’s about $770 per month, or about $170 per week over the course of the year. Your total savings is only $237,500 – the rest is covered by the power of compound interest. You can spread that $237,500 across twenty five years, too.

If your timeframe is 30 years – meaning you’re around age 35 – you’ll need to save around $7,000 per year to make it. That’s about $580 per month, or about $130 per week over the course of the year. Your total savings is only $210,000 – the rest is covered by the power of compound interest. That $210,000 is spread across 30 years to boot!

Your actual savings responsibility is getting smaller and smaller with each additional factor that you consider!

Remember Matching Funds from Your Employer

Now, let’s say you’re lucky enough to work for an employer that offers matching funds in your 401(k). If your employer offers a dollar-for-dollar match, your savings target literally drops in half.

So, let’s say you’re looking at a 20-year timeframe. Your $272,000 in savings drops to $144,000. You only have to save $570 a month, or roughly $125 a week.

What about a 25-year timeframe? Your $237,500 in savings drops to $118,750. You only have to save $385 a month, or about $90 a week.

What about a 30-year timeframe? Your $210,000 in savings drops to $105,000. You only have to save $290 per month, or about $70 a week.

Matching funds, if they’re available to you, make a giant difference. If you’re age 35 and your employer matches 401(k) contributions, you can save $70 a week starting now and you’ll likely be fine in retirement, even with reasonable inflation.

Don’t Panic or Give Up

Here’s the problem:

I can’t even tell you how many people within 10 or so years of my age have looked at retirement, decided that the number is so huge that they can’t do it, and just not even try, assuming that they’ll work until they die.

The trick is to not panic. The worst thing you can do is throw up your hands and assume that things are impossible. They’re not impossible. In fact, if you’re age 40 or under, things are actually pretty easy.

The most important thing you can do is start saving now. Don’t wait until tomorrow or the end of the month or the end of the year. Every week you wait is a week where you’re not saving, where you’re not getting the power of compound interest to work for you, where you’re not snagging that employer match.

It’s not even that important how you save. Don’t stress out about choosing the right investment. Just choose a good one that makes sense to you and then revisit it down the road, as you can always switch investments within a retirement account.

Just open up your 401(k) or a Roth IRA today. Get started on saving for retirement. If you do that right now – and you remember all of the other factors working in your favor – you’ll be able to make your retirement goals.

The mountain simply isn’t as big as you initially think it is.

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Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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